Question

At December 31, 2019, Linda Williams Corporation reported current assets of $349,720 and current liabilities of $189,400. The following items may have been recorded incorrectly.

1.		Goods purchased costing $23,670 were shipped f.o.b. shipping point by a supplier on December 28. Williams received and recorded the invoice on December 29, 2019, but the goods were not included in Williams’s physical count of inventory because they were not received until January 4, 2020.
2.		Goods purchased costing $14,140 were shipped f.o.b. destination by a supplier on December 26. Williams received and recorded the invoice on December 31, but the goods were not included in Williams’s 2019 physical count of inventory because they were not received until January 2, 2020.
3.		Goods held on consignment from Claudia Kishi Company were included in Williams’s December 31, 2019, physical count of inventory at $13,630.
4.		Freight-in of $3,190 was debited to advertising expense on December 28, 2019.

Compute the current ratio based on Williams’s balance sheet. (Round ratio to 2 decimal places, e.g. 2.31:1.)

The current ratio

:1

Recompute the current ratio after corrections are made. (Round ratio to 2 decimal places, e.g. 2.31:1.)

The current ratio

:1

By what amount will income (before taxes) be adjusted up or down as a result of the corrections? Assume that goods are sold in item #4.

Adjust income $________

Answer 1

1	The Current ratio	1.85	:1
	($349,720 / $189,400)
2	The Current ratio	2.07	:1
	($349,720 + $23,670 - $13,630 + $3,190)/ ($189,400 - $14,140)
3	Adjust Income	$24,180
	Working
1	Understatement of ending inventory	$23,670
2	Overstatement of purchases	$14,140
3	Overstatement of ending inventory	-$13,630
4	Overstatement of advertising expense	-$3,190
	understatement of cost of goods sold	$3,190
		$24,180

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